Scavenging for Bargains

Tag Archives: BOL.AX

Almost 3 years ago I entered a position in Boom Logistics with a simple thesis. The company, that specializes in renting out cranes, was at that point in time trading at A$0.135/share while it had A$0.51/share in tangible assets, mostly consisting of cranes and other big equipment. My bet was this equipment could easily be sold for a price closer to book value than the market was implying, giving downside protection even if the business would not turn around.

Now that we have moved forward a couple of years in time it’s easy to check if that was indeed true, and it appears that I was wrong. The business has so far not yet turned around, and while Boom Logistics managed to use equipment sales to manage their debt load net tangible assets per share dropped to A$0.33 in the mean time. In the first half of FY2017 the company for example transferred A$4.7 million in equipment to “assets held for sale” while recognizing an impairment loss of A$1.9 million, implying a discount of 42% to book value. If we take a bit of a short cut and apply the same discount to their whole fleet of cranes we get a NAV/share of A$0.16. Still a bit higher than the latest share price of A$0.12, but it’s a marginal difference (and in 2016 the discount was actually bigger). So I sold my position today, incurring a loss of 11.1% on my purchase price. Obviously not a great result, but you can’t be right all the time. Although in this case, I’m pretty sure that if I would have followed the company closer I would have recognized that my thesis was broken earlier. So that’s something I’m trying to improve on.

Disclosure

Boom Logistics released a market update yesterday to give some insight in what to expect when the FY14 results are released next month. The company will post a big loss, but mainly because all goodwill has been written down to zero. What is more interesting is what we can learn about the companies asset value from the latest developments and impairment charges. Boom Logistics recognized an A$4.5 million impairment on assets held for sale. With $15 million in assets held for sale after this write-down this implies a 23% discount.

A 23% discount is great at current prices, but the asset value is likely even higher because Boom Logistics has a history of writing down assets for sale and consequently booking profits on sale. The second half of 2014 wasn’t an exception:

Also note that part of my initial thesis here is confirmed, namely that the company would be able to sell its equipment internationally. A crane that can be used world wide will maintain Its value even when business sucks in Australia. A small impairment of fixed assets in Western Austrailia also confirms that the equipment value is still there:

What’s also positive is that net debt has been reduced from A$102.0 to A$89.5 million the past six months. It’s not only good news though. The company spent $16 million in 2014 on new equipment which seems a bit excessive given the amount of idle equipment they presumably already have, and the fact that there have been no share repurchases is also a negative. Doubt if that’s an optimal allocation of capital…

Disclosure

After my unsuccessful dabble in Emeco a reader pointed me in the direction of Boom Logistics: a company that is in many ways almost identical. Boom Logistics is also an Australian rental company with a big exposure to the mining industry and a heavy debt load. The type of equipment is different though: Boom Logistics owns and operates more than 400 cranes and over 250 travel towers. Before diving deeper in the company some quick metrics:

What we see here is that Boom Logistics is trading at a significant discount to book value. So if book value even remotely resemblances economic value the upside could be huge. At the same time there is a significant amount of debt, but it’s a lot less than what Emeco needs to cope with. The deb/equity ratio of Boom Logistics is 1.59x versus 2.88x for Emeco. The lower leverage provides a bigger margin of safety, and a lack of one was exactly why I sold Emeco.

Asset valuation

Cranes are assets that are not purely used in the mining sector making the value of the assets less dependent on the state of the Australian resource sector (and by proxy the Chinese economy). The mining sector itself is pretty important for the operational results of Boom Logistics since it accounted for 68% of revenue if FY2013.

We have a couple of data points that can be used to guesstimate how much the equipment is worth. Last year the company recorded a A$11.0 million impairment and A$6.0 million of this amount was attributable to “assets classified as held for sale”. With A$10.9 million in assets classified as held for sale at the end of FY2013 this implies that the assets were written down by 35.6%. While Boom Logistics would still be significantly undervalued if we would apply this discount to the whole fleet there are a couple of reasons to believe that this discount is overly pessimistic:

In the subsequent first half of FY2014 Boom generated A$9.9 million from the sale of equipment and recorded a net profit on disposals of A$2.5 million. If we assume that this profit is representative for the value of all the assets held for sale at the end of FY2013 the true discount to unimpaired book value is just 14.4%.

Boom Logistics sold equipment that wasn’t a good fit with the rest of their fleet and that should be expected to have less value in the used equipment market because they sold “the less recognised brands, one-off, specialised, prototype or unusual model cranes”.

The latest interim report contains some other hints that the intrinsic value of Boom Logistics’ assets doesn’t diverge hugely from book value. Being able to sell assets at a premium to book value is very encouraging, although it’s obviously a small sale:

During January, the Group sold its Tasmanian access & general hire assets to local Management for proceeds of $1.55 million and a profit on sale was realised which will be recognised in second half accounts.

The refinancing of the debt in December is another positive:

In December, the Group successfully completed the refinancing of the company’s syndicated bank debt facility, which was due to mature in August 2014.

The A$120 million 3 year revolving debt facility has been provided by existing syndicate members National Australia Bank and GE Capital and introduces ANZ Bank as a new syndicate member.

The rigorous due diligence performed as part of this refinancing has given the Group further significant comfort in respect of the carrying value of its assets.

What’s probably the best sign is that the new debt facility carries the same 7.5% interest rate as the old debt while covenants have been loosened. Note that interest rates in Australia are higher than in the US and the EU by approximately 2.5% so this is a pretty reasonable rate and a lot better than the ~10% rate that Emeco is now paying.

Pinpointing how much the assets of Boom Logistics are exactly worth is hard, but you don’t need to be very precise at the current market price. If we assume that their other assets and liabilities are simply worth book value we get the following graph:

The market seems to be thinking that Boom Logistics equipment is worth a bit less than half its book value while I’m thinking that a 35% discount is already pretty pessimistic.

As a sanity check we can also look at how Manitowoc (NYSE:MTW) and Terex (NYSE:TEX) are doing. See for example the slide below from the latest Terex presentation:

Crane segment backlog totaled $842 million as of March 31, 2014, an increase of $267 million, or 47 percent, from the fourth quarter 2013. First-quarter 2014 orders of $733 million were 29 percent higher than the first quarter of 2013, representing a book-to-bill of 1.6 times. Orders in the quarter include all confirmed orders that were placed at the ConExpo trade show, of which approximately 26 percent of the backlog will be delivered in 2015 or later.

The lower demand that Boom Logistics is facing seems to be a local issue. In Manitowoc’s 2013 annual report we can find the following table with a geographic breakdown of revenue:

As is visible their revenue in Australia was down by a significant amount, but they are doing fine in the rest of the world. This is also a point were Boom Logistics differs positively from Emeco. The various mining equipment manufacturers are seeing a strong worldwide drop in demand and as a result the prices of second hand equipment are also dropping world wide. Boom Logistics should have a lot less trouble to sell their equipment globally for a good price, and their results so far seem to indicate that this is indeed the case.

Insiders

A weak point in the thesis – one that Emeco also shared – is that insiders own very little of the company: just 1.0%. But it doesn’t appear that corporate governance is a problem at this point in time. The company put for example a freeze on senior executive salaries during FY14 which is appropriate given the current results and the fact that they are also shrinking the work force. Seeing management shrink a company is in my opinion always a good sign from the governance perspective.

Management is also thinking about shrinking the company through share repurchases. This could generate a lot of value if the company is in fact undervalued, and it appears that management seems to think this is the case:

Following last year’s level of capital investment we expect a significantly lower requirement for new investment in FY14 and free cashflow will be directed to further debt reduction and an expected on-market share buyback. The latter is a response to the continuing gap between our share price and the underlying net asset backing per share of 51 cents.

You have to question though how strong their believe is when you don’t see insider buys…

Conclusion

Until now I haven’t talked about earnings and cash flow, but that is because the company produced and is producing plenty of both. It’s currently trading at a P/E of just 7.5x when we annualize the results of the first half of FY2014 and exclude one-time gains and losses. If utilization improves the company could earn a massive amount compared to its current market cap, and when things don’t turn around they can sell idle equipment.

I don’t hope that they need to liquidate a big part of their fleet, but I think that at current prices they could do that and as a shareholder you would still be able to generate a healthy profit. The asset value is there to provide a margin of safety. Buying something cheap that could produce great returns when things turn around is easy. Buying something cheap that can also produce great returns when things don’t turn around is a lot harder, but I do think I have found that combination in Boom Logistics.